Removing barriers to getting a mortgage

HUD has been talking to their counterparts in the government about the reduction
in FHA loans.

Jamie Dimon from JP Morgan stated in a conference call that perhaps its time to re-
think doing FHA loans.

Mortgage Bankers are looking at alternatives to Fannie Mae and Freddie Mac loans.

Why is all this going on?

Lenders are tired of being sued for lending. That one-sentence probably best sums
it up. The days of subprime mortgages and bad lenders were cleansed when the
market crashed and rinsed and washed a second time with some valuable Frank-
Dodd reforms.

However, the US government continues to sue lenders and announce large
settlements, regulators continue to overzealously enforce provisions that even they
do not fully understand and banks and bankers seek to settle because the cost of
litigating is high, but to litigate your regulator is toxic.

What choices do lenders have? Lend without using Fannie, Freddie or FHA. Tighten
lending standards above and beyond what CFPB requires and deny credit to anyone
who would have gotten a loan as recently as 2011. And, lenders now over
underwrite and over request documentation while over disclosing and demanding
proof from the borrower that they received the disclosures to ensure they are in
compliance.

So, HUD and Fannie have taken a step back. HUD is in the process of re-writing their
FHA lending requirements and Fannie and Freddie are looking at providing a more
concise lending matrix that is very clear about how lenders can protect themselves
from claims over bad loans.

The claims over bad loans are a big issue to lenders. Fannie, Freddie and HUD all
look to kick a loan back to the lender for the smallest of things when that loan is,
typically, found to be 30 or 60 days late. The late payment status of a particular
loan triggers a complete review of the loan. Any t not crossed or I not dotted
triggers buy back demands. This then triggers lenders to demand buy backs from
other lenders and the game of Hot Potato with Mr. and Mrs. Smiths mortgage
begins. As the game heightens and the loan gets sent from lender to lender back
down the chain, the borrowers find themselves getting notices that their loan
payment is not due to lender X, its due to lender Y now and maybe in 3-months it
may be due to lender Z. This hurts everyone and typically is caused by Mr. Smith
forgetting to make the mortgage payment and everyone from Fannie to the small
mortgage banker that originally originated the loan getting involved in who has
what exposure.

Now, Fannie, Freddie and HUD realize that the mortgage market has gone too far in
tightening credit. They dont cite the reasons, but the reasons are clearly outlined
above they and the government went too far and became too punitive following
the market crash of 2008 and 2009.

To ease the situation Fannie, Freddie and HUD know they have two issues to attack.
One is the reduction in credit to individuals that is pushing potential homeowners
into the rental market and slowing the home buying market. The second is being
clear to lenders that if they lend in good faith and follow the rules, they will not be
held accountable if a loan becomes non-performing.

Recently, Fannie and Freddie announced that they were working to clarify what
constitutes a buy back. In 2013 they stated that no buy back would be demanded if
the borrower did not miss any payments for three years. In May they announced
that the borrowers could miss two nonconsecutive payments within three-years
without triggering a buy back demand.

The agencies are now working on other issues including small mistakes (minor
clerical errors or missing paperwork that does not alter the soundness of the
underwriting decision made while processing and approving the loan). Thats a big
concern for lenders because many banks and agencies will look for a missing pay
stub or a missing disclosure to trigger a buy back on a loan that they just want to
find a reason to demand it be purchased because they simply do not want that loan.

Also, fraud is coming into view in the horizon. They are finally looking at what
constitutes fraud and the definition of that. This is an important point because
lenders have met and exceeded due diligence in making a mortgage to a borrower
only later to find out that the borrower was slick in providing false and misleading
information to the lender to induce the lender to provide a mortgage. This has led
many lenders to close, others to be wrongfully accused of fraud and yet still others
to lose a lot of money on fraudulent loans. And, this problem, comes from
consumers and individuals outside the mortgage industry. The general public has
been sold the story by the US Government that the bad guys are the mortgage
professionals and they do not know the story of the bad person who may be living
next door to them that pulled off a sophisticated mortgage fraud scheme to acquire
their home (which, is the equivalent of stealing hundreds of thousands of dollars
from a bank but since it was not done with a stick up they are not, in many cases,
being prosecuted. Instead, the lenders is being scrutinized by investigators from
three, four and five federal agencies looking for anything to indict a company or staff
of a felony; when in fact they were a victim. Most people dont view lenders as
victims following the outrage of the crisis and the shrill voice of uniformed
politicians throwing red meat to the angry voter)

So, how does the government provide lenders with the protections that they need so
that they can make solid, good loan decisions based on information provided to
them and received by them using third party tools to verify said information
without fear of being second-guessed later on?

How does the government reduce angst by lenders so that they loosen up credit?

And, how does the government address the fraud question and determine who is
culpable (and this is a sticky one because, in the defense of the government, anyone
could have committed the crime since theres gain to be had for everyone in the
process from the lender to the loan officer to the borrower to the attorney to the
realtor and so on).

Well, that process has begun.

Fannie & Freddie are coming out with new road rules that address buy backs and
addresses expanding credit to borrowers with lower down payments. And, theyve
begun to attack the buy back issue along with the fraud issue.

HUD also has begun that process

So, it may be a new day in the mortgage industry where saner heads prevail and the
adults take control of the room from the crazy kids who ran rampant.

Perhaps returning to vanilla products that were available before Clinton pushed for
expanded home ownership is a sound decision. Perhaps throwing in a few more
products like one or two expanded ratio products geared specifically to LMI
borrowers as defined by HUD medium incomes, issued by Fannie/Freddie is wise.
Sticking to basic DTIs and sticking to basic credit requirements is key.

In 1995 the mortgage market began to see the lugs that held the wheels to their cars
loosen when first the government announced that certain minorities lacked access
to traditional credit and an underwriter could use alterative credit sources and
such began the process of tiered credit (Tier I, Tier II and Tier III credit) that could
be used instead of traditional credit reports.

That lead to tossing the basics out of underwriting and off loaded tax returns,
eliminated proving income, went off only credit if the borrower put enough down
and lent to borrowers at higher and higher DTIs to get the coveted CRAs from the
government.

That was insanity. And, that led to the subprime market. And, that is a story the
government does not want told - its to arcane a story to tell and the public would
prefer to dumb down what happened and blame the lenders. This works for the
likes of Barney Frank who pushed for the very rules he railed against in hearings in
2008 and 2009.

Maybe now we realize that too far left and too far right is simply too far. Perhaps we
now get that lending soundly means lending rules should be clear, concise and
across the board. The basic underwriting tools used from the 1990s were sound,:
they should be used universally.

Borrowers who dont meet the criteria of vanilla conforming or vanilla govy loans or
even vanilla expanded credit loans (lower LTV) should be viewed as tomorrows
borrower. Not todays reject or the need for some politician to interject about unfair
and discriminatory lending demanding new lending laws.

Lenders and agencies need clear rules of the road that dictate when a loan does not
conform to agencies guidelines or regulations that then does trigger a buy back.

And, regulators and the government need to let people know that they will
prosecute Joe Blow for lying on his mortgage application and getting a mortgage in
addition to prosecuting rings of thieves who do so and rings of those in the industry
who do so. Breaking lending laws is not just the provence of those inside the
lending industry.